How the Fed impacts stocks, crypto and other investments

Higher rates have been playing out on stocks, cryptocurrency and commodities such as oil over the past few years. But now that short-term interest rates are declining, what can investors expect from here, and how long will the shifting rate environment impact markets?

The Federal Reserve opted to lower interest rates at its Dec. 17-18 meeting, decreasing the federal funds rate by 25 basis points to a range of 4.25 to 4.5 percent. With inflation off its highest levels, the nation’s central bank decided it was an appropriate time to cut rates further, after trimming rates by 50 basis points in September and 25 basis points in November.

More rate cuts may be on the way in 2025, helping buoy the U.S. economy.

Investors look forward to lower rates

Interest rates are one of the biggest tools the Fed has for influencing the economy. By lowering rates, the Fed can stimulate economic activity, making it cheaper to borrow. On the other hand, by raising interest rates, the Fed can slow economic activity, making credit more expensive — which is a useful strategy to fight inflation.

While the Fed raised rates 11 times during the last tightening cycle, it’s easy to spot when markets really sat up and took notice that the central bank wasn’t kidding that it was about to recalibrate monetary policy. It was November 2021 when cryptocurrency and many of the riskiest stocks peaked.

“When the Fed introduced restrictive monetary policies by increasing rates in 2022, this caused equity markets and cryptocurrencies to appropriately decline in valuation,” says Octavio Sandoval, principal at Illumen Capital.

“The stock market will never not worry about future interest rates,” says Steve Azoury, head of Azoury Financial in Troy, Michigan. “The cost of borrowing impacts all areas of investing, purchasing and savings. Just the anticipation of what may happen is enough to cause a stock market reaction.”

While rates were moving higher, many stocks were moving lower, anticipating slower economic conditions. But when investors got a clearer picture of the end of rising rates in 2023, the outlook became more optimistic.

Major stock indexes such as the S&P 500 spent most of 2022 in a funk due to rising rates, but they fared well in 2023. The S&P 500 rose about 24 percent last year, while the Nasdaq Composite climbed around 43 percent. They followed that up strongly in 2024, with one of the best years on record so far.

But after strong run-ups in 2023 and 2024, there may be plenty of room for markets to fall if the economy worsens.

Amid rising interest rates, many unprofitable high-growth stocks had a rough 2022, and while prices firmed up in 2023, that doesn’t mean these stocks are still anywhere close to their prior highs.

For example, software stocks such as Cloudflare, Zoom Communications and Confluent are well below the all-time highs they hit in 2020 or 2021. Nonetheless, profitable big-name stocks such as Microsoft, Apple and others in the Magnificent 7 have set a series of new all-time highs despite the moves in rates, even after a lackluster 2022.

In 2022, cryptocurrency prices struggled as interest rates looked to move higher, but when rates began to top, crypto prices bottomed and then moved higher in 2023 and throughout 2024. And the introduction of Bitcoin ETFs has helped boost the price of Bitcoin. The prospect of lower rates and inflows to ETFs have pushed Ethereum higher, too.

How will lower interest rates affect stocks?

Stocks and cryptocurrency endured notable volatility as investors factored in rising rates. But what’s in store for the next six months, with the Fed lowering rates and expected to lower them even more?

The expectation of lower interest rates buoyed rate-sensitive sectors such as banks and real estate investment trusts (REITs). Small-cap indexes such as the Russell 2000 also fared well as the market began to price in the possibility of rate cuts happening.

In the meantime, markets continue to re-adjust to the economic environment, with the expectation that rates are poised to move even lower.

The bellwether 10-year Treasury, now offering a 4.40 percent yield, is well below its 2023 high of 4.99 percent set in October 2023. That’s even after a surge to start the year and a more recent move higher following the Fed’s September and November rate cuts. Lower Treasury rates and a lower fed funds rate make it easier for money to flow through the economy, helping to boost markets or at least support them more than with no changes.

How interest rates have affected crypto and commodities markets

Some other major asset classes have had varied responses in the face of fluctuating rates.

While cryptocurrency prices plummeted along with other risky assets, many commodities spiked higher in early 2022, including oil, but many of those moves proved short-lived. With the rising fed funds rate slowing and then pausing in 2023, both oil and crypto seem to have found some support, while gold powered higher.

Gold has long been a safe haven in times of volatility. The yellow metal has been on a tear in 2024, as the pending arrival of lower rates and potential market volatility helped boost its price.

Cryptocurrency has often been touted as a cure-all for what ails you, whether that’s inflation, low interest rates, lack of purchasing power, devaluation of the dollar and so on. Those positives were easy to believe in as long as crypto was rising, seemingly regardless of other assets.

“The truth is that crypto prices have proven to be impacted by the same directional sentiment that impacts retail stock investors,” says Dan Raju, CEO of Tradier, a brokerage platform. “In general, high interest rates scare investors away from riskier investments like crypto, and the lowering of rates will be seen as a positive by the crypto investor community.”

Indeed, cryptocurrencies responded to reduced liquidity as did other risky assets, by falling when the Fed announced in November 2021 its intention to raise rates and then throughout 2022 as the Fed aggressively followed through. On top of that, the blow-ups of cryptocurrencies and exchanges such as FTX hammered traders’ confidence in these virtual assets.

But instability in the banking sector in 2023 led many traders to bid up cryptocurrency, in the belief that the future path of rate increases would be less severe. And as 10-year Treasury rates peaked in October 2023 and then fell, riskier assets rose, as the path to lower interest rates appeared clear and then actually did appear in September 2024.

However, other factors are also at play in the rise of cryptocurrency over the past year. One of the most notable is the approval of spot Bitcoin ETFs.

In early January 2024, the SEC approved 11 asset managers to offer Bitcoin ETFs. The expectation of the approval helped the cryptocurrency finish 2023 strong, and then the inflows to the new ETFs helped power the cryptocurrency to new all-time highs in 2024.

As for commodities, many have been well off their recent highs, as fewer supply constraints and higher interest rates work to take them down a few notches. But the expectation of lower rates has helped keep oil from falling substantially below $70 a barrel in 2023 and 2024. Pricing has also been supported by petroleum-producing countries that have announced supply cuts and some overall tightness in the market.

For example, the price of oil had been in a steady downtrend to around $70 per barrel after peaking at around $123 in June 2022. And in 2023, oil bottomed around $70 and floated between there and $80, despite a mid-year rise to $90. After hitting about $70 per barrel in early December 2023, oil bounced around between $70 and $85 for much of the year.

How should interest rates impact your investing strategy?

Interest rates, inflation and uncertainty — all create a stew of volatility for investors. With so much volatility, investors may want to tread cautiously.

However, the best way for most investors to approach this type of market is to stick to the long-term game plan. For many, the long-term plan means continuing to invest regularly in a diversified portfolio of stocks or bonds and mostly disregarding the noise around the world. For others, the game plan may involve buying and holding well-diversified index funds. Either way, don’t let emotions get in the way of an effective long-term investing plan.

While short-term traders may be sweating rate movements, it’s vital to keep things in perspective. Instead of trying to find the right time to sell, buy-and-hold investors can use the market’s volatility to their advantage and then try to find the right time to add more.

“For long-term investors, the pullbacks represent attractive buying opportunities,” says Greg McBride, CFA, Bankrate chief financial analyst.

Downturns can be an attractive time to add to your portfolio at discounted prices. As investing legend Warren Buffett once said, “You pay a very high price in the stock market for a cheery consensus.” That is, stocks are cheaper when few agree that they’re an attractive investment.

Bottom line

Interest rates rose fast in 2022 and 2023, and now the Fed has lowered rates again and may continue to do so in 2025. Those investors with a long-term investing horizon may view any downturn as an ideal time to pick up some quality investments at bargain prices.

And if stock valuations plummet? Buffett has some wisdom for that situation, too: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.